Bank BTN, a Short-Term Trading Opportunity

Bank BTN (BBTN) had a rather poor financial performance in 2014 in which its net profits fell from Rp1.6 trillion in 2013, to only Rp1.1 trillion in 2014, or down 28.6%. Although seem disappointing, but in fact this is the first time in the last eight years in which the company recorded a net profit that is down over the previous year (in 2006, BBTN profits were down compared to 2005, but it was because in 2005 the company did not do a provision for the payment of taxes). While between 2006 and 2013, the bank profits continue to rise consistently, as well as its equity.

So in this case I can say that although BBTN is not a very profitable company since the beginning (within the last five years, BBTN’ ROE was only at the level of 15 – 18%. Although the numbers were not bad, but they are lower than ROE of the other three state-owned banks), but it is also not a poor company. In the current situation, we can mention BBTN as 'a good company whose current performance is poor'. Just a note, Warren Buffett prefers companies like this BBTN than ‘turnoaround companies’, ie companies that had bad financial performance almost all the time, but the performance is suddenly become better in the current years.

The good news, the stock price of BBTN already reflect the company’s financial performance. When this article was written, BBTN traded at Rp1,070 per share, relatively low compared to the average price over the last year ie 1,200's. On the other hand, with PER of 10.1 times and PBV 0.9 times only, then from the side of valuation, BBTN at the current price is more attractive than the stocks of its fellow state-owned banks. More can be seen in the following table:

Stocks	Price (Rp per Share)	PER (x)	PBV (x)	ROE (%)	Mkt Cap (US$ Million)
Bank BRI	12,875	13.1	3.3	24.8	26,468
Bank Mandiri	12,000	14.1	2.7	19.4	23,333
Bank BNI	6,875	11.9	2.2	18.3	10,684
Bank BTN	1,070	10.1	0.9	9.1	942

Note:

1.      Market cap is based on exchange rate of Rp12,000 per US Dollar.

2.      ROE is calculated based on the net profit for the year attributable to the parent entity, divided by net equity of the company at the end of 2014. The figures shown in the table above may be lower than the ROE figures presented in the financial statements of the companies.

Well, if you see the table above, it appears that the return of BBTN is only a third of the return of Bank BRI (BBRI), whereas the value of total assets of BBTN was less than one-fifth of BBRI (the larger the value of the assets of a company, the more difficult for the company to make high annual returns), and it makes BBTN’ performance to seem even worse, as well as explain why the stock was not going anywhere when the stocks of its three brothers continue to run fast over the last year.

However, please note that BBTN’ return of only 9.1% (or 10.7%, if we use the ROE that is presented in the financial statements of the company), is lower than the average return of BBTN in the last five years or even more, namely 15 – 18%. So the year of 2014 was really an exception for BBTN’ financial performance. Make a guess, if the company manage to make an annualized return of 15 – 18% as usual in the first quarter of 2015, then what about the stock? Of course, it will up again. On the other hand, because the valuation is very low since the beginning, so even if the company’s performance is not becoming better in this 2015, the shares will not dropped further.

You may ask, what was the cause of the decreased profit of BBTN in 2014? There is no definite answer to this question. But considering that BBTN is not the only bank who had a decline in its net earnings (some middle-class banks such as Bank Danamon, Bank CIMB Niaga, and Bank BJB, also experienced a decline in their net earnings in 2014), then the cause is probably due to the tightening of liquidity in the banking sector in general, where the BI Rate increases thus followed by a rise in interest rates on loans and deposits (so that banks had difficulty in lending the credit, while on the other hand they have to pay higher interest to depositors). As we know, between 2009 and 2013, the banking sector in Indonesia had a golden period in which the BI rate continued to fall from 9.25% by the end of 2008, and reaching its lowest pointie 5.75% in 2012 to mid 2013. At the time, the bank could easily lending their credit, including mortgage loans that were BBTN’ specialization.

But entering the month of May 2013, the BI rate began to rise until touched 7.75% in January 2015 yesterday (before then started to dropped to 7.50% as it is now). The Bank Indonesia (BI) even also provided guidance to banks to lower the growth of lending to be 15 – 17% only in 2014, and here's the problem: In contrast to its three brothers namely BBRI, Bank BNI (BBNI), and Bank Mandiri (BMRI) which has several sources of income outside of lending, such as a wide range of fee-based income until insurance, and because the lending itself can be targeted to the various segments such as consumer loans, corporate loans, microcredit, as well as mortgage loans, then BBTN seems to rely on income from mortgage lending and its sharia unit only. BBTN of course have sources of income beyond lending for mortgage and property, one of them is the priority banking services established since 2010, but its contribution was very small.

And the result, BBTN revenue only grew 18.8% throughout 2014, or much lower than the BBRI, BBNI, and BMRI, whose their revenue rose 25% in average. Because on the other hand the operating expenses rose higher, and because of the allowance for impairment of assets worth Rp771 billion (this figure is actually large because BBTN profit was only Rp1.1 trillion), then BBTN’ net profit become depressed. Related to the allowance, in this case we can assume that the management of BBTN are less competent in terms of maintaining the quality of lending, where the ratio of non-performing loans (NPL net) of BBTN was very high at 2.8% (while the BBNI, BBRI, and BMRI, their net NPL were only 0.3 – 0.4%). Take it simple, when someone take out a loan from Bank BTN, then he is seven times more likely to be fail to pay his debt, compared to other person who took out a loan from Bank BRI. And the fact, this problem of bad quality credits have been occured since a long time, where between 2009 and 2014, net NPL of BBTN always recorded between 2.2 – 3.0%. And this may also explain why the return of BBTN is somewhat lower than its fellow state-owned banks.

Because revenue of BBTN only depend on the mortgage loans in the absence of alternative income, it can be said that the future performance of the company will also depend on central bank’s policy in determining the policy rate. The good news, we know that BI Rate began to down lately. So although it is difficult to expect that BBTN can generate ROE above 20% due to the company's dependence on the mortgage loan (and also because the problem of bad quality of credits), but it is still realiztic to expect that the ROE may return to the normal level of 15 – 18%. If management can take advantage of the momentum of the lower BI Rate and able to make an increasing net profit in the first quarter of 2015, the stock may easily back to its normal/fair levels, ie Rp1,200 to 1,400 per share.

Okay, so does that mean that the shares are worth collected at the current price? Well, I was actually interested in this BBTN because the limit of the price when it is declining has been very clear, ie 900 – 1,000, and from the point of view of valuation it can be explained: The shares of BBTN are liquid, the stock may be said to as a blue chip, and BBTN is also one of the largest, prominent, and the most-established company in the country (if you pass the area of Harmoni, Central Jakarta, you may find the company’s ‘grande’ office just on the side of large intersection). Then how could the stock traded at a PBV of 0.8 times only? Even if we consider that the company’s financial fundamental isn’t too good, but it is also not that bad, is it? At the end, BBTN continues to operate normally without any significant problems, still regularly pay dividends each year, and the net asset value of the company also continues to grow over time. We can say that, although this company is not so wonderful, but after considering everything, the price is absolutely wonderful!

So if you buy BBTN at the current price, then the risk is very low that unless there are extraordinary events or Jakarta Composite Index (JCI) fallen apart, then BBTN will not drop lower than 1,000 or 900. On the other hand the stock will easily go up to say 1,400, if: 1. The company recorded a profit increase in the first quarter of 2015, 2. The company declared a dividend, or 3. The news about the proposed merger between BBTN and BMRI or other state-owned banks (this is actually an old story, but the merger is yet undecided until today) resurfaced. So, although BBTN may not be a good option for a long-term investment unless the management succeeded in creating revenue beyond mortgage loans (and also managed to suppress the ratio of the loan), but at the current price, the stock offers trading opportunities, where you may be able to obtain the gain of 10 – 20% within a relatively short time (1 or 2 months, or perhaps less than that), while the worst risk is that you only wasted your time that after some time the stock is still not going anywhere.

The problem of the lower interest of Mortgage Loans

One more thing. You may notice that the stock of BBTN is recently declining due to the news that the government cut the rate of subsidized mortgage loan from perviously 7.5% to only 5%, with the aim that more people can afford to buy a house. Because BBTN has been designated as one of the executors of the subsidized mortgage program, then people in the stock market think that BBTN should also lower their mortgage rate to 5%, which if it happens then BBTN revenue will drop like crazy. As a result, the stock was immediately down from 1,200 at the beginning of January 2015 until touched 975 as the lowest point, and has not rise back until today.

But the fact is as follows: One, the general rate of mortgage lending in BBTN is 11.5% per annum, which the rate follows the BI Rate. Two, of the total mortgage loan portfolio of BBTN throughout 2014, only about 5 - 6% of which were channeled through subsidized mortgage program (with the lower interest rate, ie 7.5%). And three, although BBTN receive lower interest income from the distribution of subsidized mortgage loan (because the interest is lower than the usual), but the difference has been paid off by the Government since the beginning! Just like Pertamina, which despite the company sells LPG of 3 kg packaging at the price that is actually too low, but the shortage of Pertamina’s revenue has been paid by the Government in the form of subsidies. So when the government subsidizes basic necessities to the people, then it is not the people who receive the money, but state-owned enterprises (Pertamina, PLN, Bank BTN, etc.) so that they can sell their products and services at prices that are affordable to the public, but the company's still manage to make profits.

So if the government would lower the interest of subsidized mortgage (subsidized, not a regular mortgage) to even 0%, BBTN will still not be affected by any means! Throughout 2014, BBTN received subsidies worth Rp427 billion that paid in advance from the Government related to the subsidized mortgage program, where the money will be recognized as revenue when the subsidized mortgage loan has been disbursed. If the government does actually lower the interest to only 5%, then it means that they will pay subsidies to BBTN in larger amount. The government itself through the Ministry of Housing has allocated Rp5.4 trillion or about US$ 500 million in this 2015 (the budget is already approved by the House of Representatives in early February), up from the previous year of Rp4.0 trillion, for subsidized mortgage program, which BBTN will be one of the recipients of the fund (other than through Bank BTN, the government will also distribute subsidized mortgage loan through local banks).

So, although in some cases, a certain negative sentiment indeed have a negative impact on the financial performance of the company, but I can say that related to the lower interest rate of the program  of subsidized mortgage loan, there is nothing to worry about, and that means the conlusion of BBTN is still the same as that already presented above: At the current price range, the stock offers opportunities for short-term trading with a target of about 1,200 to 1,400. We'll see.

PT Bank Tabungan Negara (Persero), Tbk (BBTN)

Rating of Performance on Full Year of 2014: BBB

Rating of Share Price at Rp1,070 per share: AA

Disclosure: When the article was published, Avere Investama (Teguh Hidayat & Partners) is in a position of holding BBTN on an average acquiring price of Rp1,032 per share. This position can change at any time without prior notice.

Any inquiries about investment in Indonesia Stock Market? Please send an email to teguh@averepartners.com.